Hysteria, Scaremongering and a Desperate Bid to Keep a Twitching EU Corpse Alive

The world economic situation has, according to IMF boss Christine Lagarde, entered a “dangerous phase”.

Central banks from around the globe have promised yet another bailout fund to stop Europe’s banks running out of money....Although the financial markets have recovered (slightly), the respite is only temporary.....Greece is still likely to default on its debts, which are 160 per cent of its annual GDP.

All that remains to be settled is the timing. It will happen when Chancellor Merkel of Germany, President Sarkozy of France, Eurocrats in Brussels and European Central Bank officials in Frankfurt finally admit the iron law of capitalism: that markets are more powerful than the wishes of politicians.

Until a few days ago, whenever one of Europe’s economic basket cases went to the German government begging for money, it coughed up...But no longer..... There are two reasons....

First, Germany’s constitutional court ruled that parliamentary approval must be given for further bail-outs......Second, opinion polls – especially those taken among Merkel’s supporters – show approval for her policy has collapsed......Not surprisingly, therefore, Merkel is turning off the tap and ordering colleagues to be wary of mentioning the word ‘default’.

Bailouts: Treasury Secretary Tim Geithner was dispensing advice in Europe Friday as the Fed began printing massive amounts of money to bail out the EU. Our government seems more worried about Europe than the U.S.....With Europe on the verge of another financial crisis, the Federal Reserve and European officials announced a three-stage "liquidity" program under which the U.S. central bank will supply dollars so Europe can buy its own bonds and keep the region's economy from going under.

Geithner and the Fed are doing in Europe just what they did here: printing huge amounts of dollars and using them to buy public debt, a kind of mega-stimulus....This may stave off a collapse of Greece, or Italy, or Spain, for a while. But ultimately, it will fail. After the default of Greece and one or two other fiscal wastrels, the euro zone could collapse — with disastrous results.

Why? ....This mega-stimulus fails to address the euro zone's actual problem — just as $3 trillion in "stimulus," TARP and Quantitative Easings I and II in the U.S. failed to address our problem: too much debt from too much spending......In 2007, the euro zone's public debt was a high but manageable 66%. Today, it's 88% — and rising fast — in the danger zone for mass defaults...... "Europe is in danger," warned Polish Finance Minister Jacek Rostowksi last week...... "If the euro zone breaks up, the European Union will not be able to survive.".....In that context, our actions in fact amount to a bailout not only for European Union banks — but also our own.

As columnist Robert Samuelson notes, "Europe accounts for about 22% of U.S. exports........ It provides perhaps an eighth of the foreign profits of major U.S. multinational firms....... U.S. banks and investors would suffer losses on their European loans and investments.".....And that doesn't include the $658 billion lent to Europe by large U.S. money-market funds.

Bailouts won't last, however, because euro zone countries have been reluctant to follow fiscally responsible policies........ Under the original Stability and Growth Pact that established the euro, countries were required to maintain deficits of 3% of GDP or less, and to keep their total debt burdens below 60%.
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